2025 (1) TMI 562 - AT - Income Tax

Denial of benefit of deduction / exemption u/s 11 12 - non-registration under Section 12AA - assessee made an alternate claim before the AO that it s income from transaction with it s members was exempt on the principles of mutuality - Levy of penalty by the AO u/s 271(1)(c) - HELD THAT - As of now, as per the order of Hon ble High Court of Gujarat 2017 (7) TMI 778 - GUJARAT HIGH COURT it is only order dated 29.09.2015 which is applicable for the impugned assessment year under consideration, in which it was held that the assessee is not governed by the principles of mutuality. Notably, while admitting the SLP, Hon ble Supreme Court has not granted any stay on the operation of the aforesaid order passed by Hon ble ITAT, Ahmedabad dated 29.09.2015. Therefore, we are of the considered view that the order of the CIT(A) wherein relief has been granted to the assessee on the reasoning that when the original basis of initiation of penalty has been altered or modified by Tribunal the AO initiating penalty proceedings has no jurisdiction, not sustainable since the very order passed by Tribuna in which it was held that the assessee is governed by the principles of mutuality has been set-aside as being non-est by the Gujarat High Court. Accordingly, looking into the instant facts, we of the considered view that the Assessing Officer has correctly levied penalty for furnishing inaccurate particulars of income When the order on the basis of which relief has been granted by Ld. CIT(A) itself has been set-aside as non-est, the order passed by Ld. CIT(A) giving relief to the assessee is not liable to be sustained. The claim of exemption u/s 11 12 was also found to be fallacious and the alternate claim of mutuality has also been rejected by Tribunal in assessee s own case. Appeal of the Department is allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the Commissioner of Income Tax (Appeals) was justified in deleting the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961, based on the doctrine of mutuality.
Whether the income from transactions with non-members should have been offered for taxation, and if the failure to do so justifies the imposition of penalty for furnishing inaccurate particulars of income.
Whether the original basis for initiating penalty proceedings was altered or modified by the appellate authority, thereby affecting the jurisdiction to levy penalty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Deleting Penalty Based on Doctrine of Mutuality

Relevant Legal Framework and Precedents: The doctrine of mutuality suggests that income derived from transactions with members is exempt from taxation. The relevant sections are 11, 12, and 12AA of the Income Tax Act, 1961. Precedents include CIT vs. Lakhdirlalji and CIT vs. Anand Bazar Patrika (P) Ltd.
Court's Interpretation and Reasoning: The court observed that the principle of mutuality applies to income from members. However, the ITAT's earlier order allowing mutuality was set aside, making the doctrine inapplicable to the assessee's case.
Key Evidence and Findings: The assessee did not have registration under Section 12AA, which was crucial for claiming exemptions under Sections 11 and 12. The ITAT initially accepted the mutuality principle but was later overturned by the High Court.
Application of Law to Facts: The court applied the doctrine of mutuality to determine that only member-derived income could be exempt. However, since the ITAT's order was set aside, the mutuality claim was invalid.
Treatment of Competing Arguments: The Department argued that the penalty should be sustained due to inaccurate particulars of income. The assessee contended that the claim was made in good faith based on existing legal interpretations.
Conclusions: The deletion of the penalty by CIT(A) was not justified, as the mutuality principle was not applicable after the High Court's decision.

Issue 2: Taxation of Income from Non-Members and Penalty for Inaccurate Particulars

Relevant Legal Framework and Precedents: Section 271(1)(c) of the Income Tax Act deals with penalties for concealment of income or furnishing inaccurate particulars. The case of CIT vs. Reliance Petroproducts Pvt. Ltd. was referenced.
Court's Interpretation and Reasoning: The court held that income from non-members is taxable and should have been disclosed. The penalty was justified as the assessee furnished inaccurate particulars by not offering this income for taxation.
Key Evidence and Findings: The assessee's failure to disclose non-member income was a key factor. The ITAT's earlier acceptance of mutuality was overturned, reinforcing the penalty's validity.
Application of Law to Facts: The court applied Section 271(1)(c) to penalize the assessee for not taxing non-member income, which constituted furnishing inaccurate particulars.
Treatment of Competing Arguments: The assessee argued that the law was unclear at the time of filing. The court disagreed, citing established precedents on mutuality and non-member income.
Conclusions: The penalty was upheld as the assessee did not disclose taxable income from non-members, thereby furnishing inaccurate particulars.

Issue 3: Alteration of Original Basis for Penalty Proceedings

Relevant Legal Framework and Precedents: The principle that penalty proceedings cannot proceed if the original basis is altered by an appellate authority was discussed, referencing CIT vs. Lakhdirlalji.
Court's Interpretation and Reasoning: The court noted that the original basis for the penalty was altered by the ITAT's decision, but since that decision was set aside, the original penalty basis was reinstated.
Key Evidence and Findings: The ITAT's order was initially in favor of the assessee but was later nullified by the High Court, restoring the original penalty basis.
Application of Law to Facts: The court applied the principle that altered penalty bases do not hold if the appellate decision is reversed, thereby justifying the penalty.
Treatment of Competing Arguments: The assessee argued for relief based on the altered penalty basis. The court rejected this, as the appellate alteration was nullified.
Conclusions: The penalty was justified since the original basis was reinstated by the High Court's decision.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The Tribunal committed a serious error in allowing the assessee's rectification applications and recalling its earlier order of rejection of appeals."
Core Principles Established: The doctrine of mutuality applies only to member-derived income; non-member income is taxable. Penalties under Section 271(1)(c) are justified for non-disclosure of such income.
Final Determinations on Each Issue: The deletion of the penalty by CIT(A) was reversed. The penalty for furnishing inaccurate particulars was upheld due to the taxable nature of non-member income and the reinstatement of the original penalty basis.

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